Ads keep this website free for you.
TaxTips.ca does not research or endorse any product or service appearing in ads on this site.  Before making a major financial decision you  should consult a qualified professional.

RESPs - Risks and Restrictions TaxTips.ca
Canadian Tax and
Financial Information

If you use an ad blocker, please consider a small contribution to help keep TaxTips.ca free for everyone.

Need an accounting, tax or financial advisor? Look in our Directory.  Use above search box to easily find your topic!   Stay Connected with TaxTips.ca!
Home
What's New
Calculators
Personal Tax
Business
Sales Taxes
Free in 30!
Financial Planning
RRSP RRIF TFSA
Real Estate
Stocks Bonds etc.
Seniors
Disabilities
Canada
Alberta
British Columbia
Manitoba
Ontario
Quebec
Saskatchewan
Atlantic Provinces
Territories
Federal Budget
Prov/Terr Budgets
Statistics etc.
Glossary
Site Map
Directory
Advertise With Us
Contact Us/About Us
Links & Resources
Registered Education Savings Plans (RESPs) -> Risks and restrictions

The Risks and Restrictions of RESPs

With a Registered Education Savings Plan (RESP) comes both risk and restrictions.

The greatest risk is that your child will not take part in qualifying post-secondary education.  This will result in paying back the federal grant portion of the RESP, and could result in forfeiture of the earnings in the RESP.  At best, the earnings can be transferred to an RRSP (maximum amount $50,000) if:

bullet there is RRSP contribution room available,
bullet the RESP has existed for at least 10 years, and
bullet the beneficiary is at least 21 years old and not pursuing post-secondary education.

If no RRSP contribution room is available, the earnings can be returned to the subscriber, again only if the RESP has existed for at least 10 years, and the beneficiary is at least 21 years old.  This will attract tax at the subscriber's marginal tax rate, plus an additional tax of 20%.  If the RESP is held in a pooled group scholarship plan, the earnings may be completely lost, with the subscriber getting back less money than was originally contributed, due to fees paid to the promoter.

RESPs are restricted to being used for qualifying post-secondary education.  With some plans, there is a set payment schedule which must be followed.  If the payment schedule is not followed, interest may be charged, or the plan may be terminated.

Another risk of RESPs was highlighted in a May 2020 Ontario Superior Court of Justice case, Santella v Bruneau 2020 ONSC 2937 (CanLII).  In this case, an intestate deceased father left a share of a Quebec condo to his minor son.  Quebec law required that a guardian be appointed with respect to the property of the minor son, so a Children's Lawyer was appointed.  Ms. Santella, widow and mother, wanted to place some of the funds from her son's portion of the sale of the condo into RESPs.  This was opposed by the Children's Lawyer because of "the historical treatment of RESP's in the context of both family law and bankruptcy proceedings.  The Children's Lawyer submits that any portion of the Inheritance placed in an RESP is at risk because of cases in which an RESP has been found to be an asset of the adult subscriber and not that of the child for whose benefit the RESP is intended."  The Court agreed with the Children's Lawyer and ordered that the son's share of the proceeds from the condo be deposited with the Accountant for the Superior Court of Justice.

The above case also highlights the problems of dying intestate (without a will).

CESG and CLB Not Payable to Non-Resident Beneficiary

Canada Education Savings Grant Regulations s. 10(3)

Note that if the beneficiary of the RESP is a non-resident at the time of Educational Assistance Payments, then the CESG and Canada Learning Bond (CLB) portions of the RESP cannot be paid.  A beneficiary can be a student at a foreign educational institution and still be considered a Canadian resident in some cases.  See our information on Canadian residents.

Tax Tip:  If you plan to start an RESP, make sure you read and understand all the details first!

Revised: April 20, 2021

Copyright © 2002 Boat Harbour Investments Ltd. All Rights Reserved.  See Reproduction of information from TaxTips.ca

Facebook  | Twitter  |  Monthly Newsletter Sign-up  What’s New E-mail Notification RSS News Feed
The information on this site is not intended to be a substitute for professional advice.  Each person's situation differs, and a professional advisor can assist you in using the information on this web site to your best advantage. 
Please see our legal disclaimer regarding the use of information on our site, and our Privacy Policy regarding information that may be collected from visitors to our site.